Price of stock

Zero growth: Ron Santana is interested in buying the stock of First National Bank. While the bank's management expects no growth in the near future, Ron is attracted by the dividend income. Last year the bank paid a dividend of $5.65. If Ron requires a return of 14 percent on such stocks, what is the maximum price he should be willing to pay for a share of the bank's stock?

Solutions

Expert Solution

Step 1 Value of stock

Dividend discount model

Stock value= dividend/(Required return-growth rate)

Step 2

Growth rate and required rate

Growth rate= 0

Required rate= 14%

Step 3

value of stock

Value = 5.65/(0.14-0)

= 40.35

Answer = 40.35

Rahul Kumar Agarwal answered 3 years ago

Next > < Previous

Related Solutions

The price of a stock is currently $39.38. The stock price by the end of the...

The price of a stock is currently $39.38. The stock price by the end of the next three-month period is expected to be up by 10 percent or down by 10 percent. The risk-free interest rate is 1.875 percent per annum with continuous compounding. What is the current value of a three-month European call option with strike price of $34.375 using a single-step binomial tree? How will you trade involving one call option to make arbitrage profits if the call...

Analyze the stock price of the Amazon common stock. What is the current stock price? Is...

Analyze the stock price of the Amazon common stock. What is the current stock price? Is it currently overpriced or underpriced according to the CAPM model and the dividend growth model?). Please give a recommendation about whether to invest in Amazon or not based on the results and current situation.

Consider a call option on a stock, the stock price is $23, the strike price is...

Consider a call option on a stock, the stock price is $23, the strike price is $20, the continuously risk-free interest rate is 9% per annum, the volatility is 39% per annum and the time to maturity is 0.5. (i) What is the price of the option? (6 points). (ii) What is the price of the option if it is a put? (6 points) (iii) What is the price of the call option if a dividend of $2 is expected...

Suppose the current stock price is $120 and the stock price in a year can be...

Suppose the current stock price is $120 and the stock price in a year can be either $150 or $100. The risk-free rate is 2% per year, compounded annually. Compute the price of a European put option that expires in a year. The strike price is K=$130 (Hint: This is a put option case, not a call option. Be careful when you compute the cash-flow at expiration date. All other calculations should be the same as call option case.)

Stock A: Stock B: Market Index Stock Price Dividend Stock Price Dividend 2016 $25.88 $1.73 $73.13...

Stock A: Stock B: Market Index Stock Price Dividend Stock Price Dividend 2016 $25.88 $1.73 $73.13 $4.50 $17.09 2015 $22.93 $1.59 $78.45 $4.35 $13.27 2014 $24.75 $1.50 $73.13 $4.13 $13.01 2013 $16.13 $1.43 $85.88 $3.75 $9.96 2012 $17.16 $1.35 $90.00 $3.38 $8.40 2011 $11.44 $1.28 $86.33 $3.00 $7.05 1.Use the data given to calculate annual returns for Stock A, Stock B, and the Market Index, and then calculate average annual returns for the two stocks and the index. (Hint: Remember,...

Stock A: Stock B: Market Index Stock Price Dividend Stock Price Dividend 2016 $25.88 $1.73 $73.13...

Stock A: Stock B: Market Index Stock Price Dividend Stock Price Dividend 2016 $25.88 $1.73 $73.13 $4.50 $17.09 2015 $22.93 $1.59 $78.45 $4.35 $13.27 2014 $24.75 $1.50 $73.13 $4.13 $13.01 2013 $16.13 $1.43 $85.88 $3.75 $9.96 2012 $17.16 $1.35 $90.00 $3.38 $8.40 2011 $11.44 $1.28 $86.33 $3.00 $7.05 Use the data given to calculate annual returns for Stock A, Stock B, and the Market Index, and then calculate average annual returns for the two stocks and the index. (Hint: Remember,...

A call on a stock with stock price $25.93 has a strike price $22 and expiration...

A call on a stock with stock price $25.93 has a strike price $22 and expiration 230 days from today, available for a premium of $7. The stock also has a put with the same strike price and expiration as the above call, available for a put premium of $3.56. Both options are European, there are no dividends paid on the stock, and the interest rate for the expiration period is 8% per year. How much could you make per...

The current price of stock XYZ is 100. In one year, the stock price will either...

The current price of stock XYZ is 100. In one year, the stock price will either be 120 or 80. The annually compounded risk-free interest rate is 10%. i. Calculate the no-arbitrage price of an at-the-money European put option on XYZ expiring in one year. ii. Suppose that an equivalent call option on XYZ is also trading in the market at a price of 10. Determine if there is a mis-pricing. If there is a mis-pricing, demonstrate how you would...

Today’s stock price is 80, 90-dollar call, on the expiration day, stock price is 85. Price...

Today’s stock price is 80, 90-dollar call, on the expiration day, stock price is 85. Price of the call is 2. What is the value of the call on the expiration day? What is the next profit for the buyer? What is the net profit for the seller? Will the options be used?

There are two stocks in the market, Stock A and Stock B. The price of Stock...

There are two stocks in the market, Stock A and Stock B. The price of Stock A today is $85. The price of Stock A next year will be $74 if the economy is in a recession, $97 if the economy is normal, and $107 if the economy is expanding. The probabilities of recession, normal times, and expansion are .30, .50, and .20, respectively. Stock A pays no dividends and has a correlation of .80 with the market portfolio. Stock...

Subjects